* Speculation over fate of investor-friendly ministers
* Erdogan pushing populist policies, spooking investors
* PM won't risk economic stability as president, analysts
By Asli Kandemir and Orhan Coskun
ISTANBUL/ANKARA, July 7 Turkish officials say
key economic ministers will stay in post if, as expected, prime
minister Tayyip Erdogan becomes president next month, and they
dismissed fears that policy would take a populist turn,
jeopardising more than a decade of strong growth.
As the first direct election to the presidency approaches,
Erdogan's outspoken criticism of the Central Bank's tighter
monetary policy and a planned tax amnesty that could waive
billions of lira in unpaid taxes have raised concerns among
investors that crowd-pleasing measures could weaken economic
There has also been speculation that the highly regarded
double act of finance minister Mehmet Simsek and deputy prime
minister Ali Babacan could be broken up in favour of more
colourful political figures, but senior government officials
told Reuters that was unlikely.
"These policies will continue with the same decisiveness.
The ministers who will implement them will continue in their
posts; there does not appear to be a question mark about that,"
one senior official said.
"In particular, there is no problem concerning Babacan and
Simsek. It is seen as certain they will continue their duties."
Although any future cabinet would be selected by Erdogan's
successor as prime minister, analysts and officials widely
expect that as president, Erdogan would secure a loyalist for
BATTLE OF WILLS
Babacan and Simsek have guided the Turkish economy towards
unprecedented stability in recent years, whilst trying to tackle
long-term imbalances including inflation and a stubborn current
account deficit. Erdogan is acutely aware of the importance of
their investor-friendly, prudent approach to Turkey's
international credibility, which should guarantee they remain a
team at least until 2015 parliamentary elections, government
Erdogan's personal preference for a more pro-growth economic
policy has, however, given rise to talk of a battle of wills in
the top tiers of government that could shift in his favour if,
as expected, Babacan leaves politics after the parliamentary
"So far Babacan and Simsek have complemented each other. It
is difficult to say what will happen in the long term, but under
current circumstances Babacan will quit politics and run his own
business," another senior government official said, noting that
the reserved and somewhat enigmatic deputy prime minister was
reaching a three-term parliamentary limit imposed by the ruling
That uncertainty adds to the worries of investors already
uneasy about growing security risks from neighbouring Syria and
Iraq, government interference in monetary policy and the
prospect of Turkey becoming more authoritarian under an Erdogan
If Erdogan triumphs in August's polls he is expected to take
on a refashioned presidency, pushing for more executive powers
in what has hitherto been a largely ceremonial role.
Since he came to power in 2002, Turkey has enjoyed strong
economic growth, averaging more than 5 percent in his first
decade, and inflation has fallen to 9.32 percent as of June from
However, some analysts argue that without fundamental
reforms, such as upgrading its governance institutions and
improving its education system, Turkey will likely see growth of
only 2 to 4 percent over the long term.
Babacan and Simsek are sharply at odds with others in
government who, backed by Erdogan, have been pushing in
particular for the central bank to cut interest rates sharply
after a steep hike in January to halt a slide in the value of
That rift could continue beyond the presidential election,
and if Erdogan becomes head of state he is likely to appoint a
'council of wise men' advisors in the presidential palace to
guide policy. If he does so, analysts will keep
a keen eye on whether the architects of Turkey's recent fiscal
stability will be included.
Babacan in particular has clashed with Turkey's combative
premier, most notably in 2010 when Erdogan rejected a fiscal
rule plan that would have cut public spending and soothed
investors looking for guarantees of Turkey's budgetary
'FREE MARKET' CHAMPIONS
In recent months markets have reacted with alarm to
Erdogan's repeated attacks on the central bank after the late
January rate hikes, raising concerns over the independence of
the central bank. His repeated assertions that high interest
rates cause high inflation have also prompted some to question
his grasp of economics.
His views are backed by Economy Minister Nihat Zeybekci, in
charge of trade, who favours a more growth-oriented policy and
has also complained that high interest rates and a strengthening
lira are damaging exports.
Erdogan has reaped political dividends from his policies of
low interest rates and a booming construction sector, but
Hurriyet columnist and former central banker Ugur Gurses said he
might not have grasped the risk of pursuing such policies in
"Turkey has so far enjoyed the yields of ample global
liquidity and neglected structural reforms. However, the PM is
not yet aware of that, and he still says, 'We have done it, we
have succeeded'. This is where the danger lies," he said.
But for all his rhetoric, analysts say Erdogan will not risk
the fundamentals that have brought such economic success for
Turkey. Former Merrill Lynch banker Simsek is only on his second
parliamentary term and will likely stay central to economic
policy making, whilst a way may even be found to keep Babacan,
believes Jonathan Friedman, Turkey analyst for London-based
"Once president, and provided he does well in parliamentary
elections, (Erdogan) will pull back from the populist rhetoric,"
Friedman told Reuters.
"Ultimately, Erdogan and the (ruling) AK Party have always
seen being champions of the free market and foreign investment
as key to their strategy of remaining in power - and this will
not change under an Erdogan presidency."
(Additional reporting by Jonny Hogg in Ankara; Writing by Daren
Butler; Editing by Will Waterman)